Tag: how to price products

A Quick Pricing Strategy Check

May 22, 2020 / Gail Oliver, Online Small Business Consultant

by Gail Oliver, Online Marketing Consultant

How long does it take you to make a product or execute a service? So many people leave their labor cost out of the price, and you need to determine this otherwise you will be working very hard to make little money.

Example of a Poorly Priced Product

For example, I’ll never forget this young girl who was making dog leashes and selling them for $10. She was knitting the leash and said it took her two hours to make one. Can you see right away why this is a terrible pricing model?

If it takes her two hours to make one $10 leash, she is essentially paying herself $5 an hour less the cost of materials, selling fees, free shipping, packaging and other business expenses. Does it seem worth it? Surprisingly, it was not that obvious to her.

The Most You Can Earn in a Day

Now, another way to look at it, is if it takes her 2 hours to make 1 leash, and she wants to work an 8-hour day, then the most leashes she can make in one day is 4. This also means that the most leashes she can sell in one day is 4, as you can’t sell more in a day than you can make.

Therefore, the most she can gross in one day = 4 x $10 = $40, and again, this is GROSS not NET.

If you are the sole source of labor for your product or service, you have to factor your labor cost into consideration when determining your price. If your labor costs knock you out of being competitively priced, then this might not be the business for you.

Work Backwards When Pricing

Try working backwards to determine your price. For example if:

Your goal is to earn $40 an hour
Your product takes you one hour to make
Your total costs per unit are $10

Then you will want to price the product at at least $50. Then ask yourself?

Is a $50 price competitive?
Does this price make sense for the product or service?
Does this price offer wiggle room for discounts and sales?

If you need more help with your pricing strategy, be sure to check out the pricing strategy and planning worksheets in my 60-page Strategic Business Planner.

Want to talk about your business? Try my very affordable one on one Phone Consultations.

Other Things to Know This Week

Shopify and Facebook announced the launch of Facebook Shops where shoppers will be able to find, browse, and buy products through Facebook and Instagram, with checkout powered by Shopify.
If you sell face masks, have you thought about targeting brick and mortar stores that are reopening, as some have stated that they will provide masks to both their staff and customers, if need be. I wonder if they will see it as an advertising opportunity to have their brand on the mask? Is that a value added service face mask makers should offer?
Even Vogue says face masks will be the hot fashion trend of the summer.
Online daily sales for pajamas increased 49% in April, due to people working from home. The major fashion retailers have picked up on this trend and are offering pajama-style fashions, like this silky outfit from Zara.
I love how online stores like Old Navy, Nordstrom, Modcloth now have shop sections entitled, “Cozy at Home”, “All Day Comfort”, “Get Fit at Home”, “Self Care Shop” and “Work from Home”, zeroing in on people’s needs right now.

Have a great week!

How to Factor Your Labor into Your Prices So You Actually Make Money

May 10, 2013 / Gail Oliver, Online Small Business Consultant

Do you need to understand a Direct Labor Cost Formula?

Pricing is a critical component of marketing. So before you start envying the volume of unit or dollar sales another business is getting, you have to remember, selling a large quantity doesn’t always translate into large profits. It could be that someone is working really hard to make very little money.

The biggest mistake most online shops make is not truly taking into account the value of their labor. So before you set the price for your products, you have to understand your labor cost and what you want to pay yourself in terms of an hourly wage.

Direct Labor Cost Formula

Let’s say that you are a one-person operation and you are making iPhone covers. You decide you want to undercut everyone else in the market and charge $15 each.

Labor – If it takes you 20 minutes to produce one iPhone cover, that means you can make 3 in an hour. If you are selling each for $15, then you are essentially paying yourself $45 an hour (3 x $15). So that’s about $79,000 a year based on a 35-hour work week, and a 50-week year. But wait. This is not your true hourly wage.

Materials – Now you have to deduct your materials. Let’s say that a plain case is wholesale $1.80 each including tax. Then there is the printing charge, let’s say .40 each. You have to get it to the customer, so even if you charge for shipping, you still have packaging costs, let’s say .30 each. So the grand total for 3 iPhone cases is $7.50. These are fixed costs. In other words, no matter what price you charge, these costs stay the same.

Selling Fees – If you are selling on an online marketplace like Etsy, you now have to deduct your fees ($.95). So for the three iPhone cases that would be $2.85 total. These costs are variable, so they go down when your price goes down, and up when your price goes up.

Ok, so now your hourly wage is down to $34.65 per hour, which is $69,300 per year in theory, if you sell 24 iPhone cases a day, 5 days a week, 50 weeks a year.

Other Expenses – But what about other business expenses? Gas to drive to the printer and the post office, packaging costs, shipping materials, bank fees, business taxes, Internet use, advertising costs. You have to factor all of these costs in as well.

Now, obviously you do have to stay in line with your competition, so you can’t charge twice what they are for the exact same product, same materials, same delivery and so forth.

So, before you set your prices, start with your desired hourly wage and work backwards from there.

If you cannot come up with a pricing model that is also a viable business model, then it is not worth doing.

Can You Believe This Seller Didn’t Price for Her Labor

I’ll never forget the seller who was knitting dog leashes. She indicated that one dog leash would take her 2 hours to make and she wanted to sell the leashes for $10 each. I tried to tell her that this was a terrible business model but she just didn’t get it. So I tried to explain it another way.

I told her that if it takes 2 hours to knit one dog leash, then likely the MOST dog leashes she can make in one day is 4 (and that’s based on a 8-hour workday). If you can only make 4 leashes a day, then you can only sell 4 leashes a day because you cannot sell more than you can physically make.

Therefore, the MOST her business could ever make in one day is four leashes at $10 each = $40 gross (we still haven’t deducted any costs). Now, does it still seem like a good business idea?

Need Help with Your Business?

If you do not know how to market your business or are not making sales, ask me a question at attentiongetting@gmail.com or check out my Consulting Services and my Store.

Why People Buy: Is Price the Reason You’re Not Selling?

December 3, 2012 / Gail Oliver, Online Small Business Consultant

why people buy When people come to your site and don’t buy, what is the first thing you assume is wrong? I bet you think it’s your price. Maybe. The truth is you have to think about what makes people buy, and price is not always a factor.

Reasons People Do Not Buy

They don’t need your product.
They don’t need your product right now.
They don’t see the value in your product.
They are unsure that you will deliver what you are promising.
Your price was too high compared to similar competitive offerings.

So if you really feel price is your problem, then here is a way to test it.

Don’t lower your price permanently but instead offer a one-day only special with a coupon code for 50% (or pick a percentage in which you will still earn a profit – don’t take a loss). Make sure customers know it is TODAY ONLY. If even at 50% off they are still not buying, then you know it’s not your price.

Do you know that too low a price can hurt you as well? If someone really loves or wants an item, and you have created that must-have feeling in the customer, price usually isn’t an object (unless it is obvious that you are completely overcharging). Sometimes too low a price makes the customer feel the product is cheap and of poor quality. So trying to undercut everyone will not always work in your favor either.

Do you know what makes people walk away from an online sale more than price? Shipping charges. Especially if you live in one country and you are buying from another. There have been cases where the shipping ends up equaling the price of the product. So sometimes it is better to offer FREE SHIPPING and buffer the cost into your product price. When a customer commits to your price and then gets to the checkout and sees it has doubled due to shipping, this is not the same exchange anymore and they WILL change their mind.

FINAL WORD: So, offer a fair price based on what it costs you to make your product and allowing for a profit, compare it to your competitors’ prices, test it with your market, and then make sure your customers understand the value that comes with this price. Related: Two Easy Pricing Strategies to Try.

IF YOU ARE NOT MAKING SALES, I can help! My 12-Month Marketing Plans will give you all the tactics you need to successfully promote your small business.